SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________________________
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2000 Commission File Number 0-13071
INTERPHASE CORPORATION
(Exact name of registrant as specified in its charter)
Texas 75-1549797
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
13800 Senlac, Dallas, Texas 75234
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(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (214) 654-5000
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Title of Class
Common Stock, $.10 par value
Indicate by check mark whether the registrant (1) has filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant on March 1, 2001 was approximately $41,967,000. As of March
1, 2001, registrant had 5,756,193 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the following documents are incorporated by reference into this
annual report on Form 10-K Report: (1) Portions of the Definitive Proxy
Statement for Annual Meeting of Shareholders to be held on May 2, 2001
(Part III).
PART I
ITEM 1. BUSINESS
Introduction
Interphase Corporation and subsidiaries ("Interphase" or the "Company")
designs, develops, manufactures, markets and supports high-performance
connectivity products utilizing advanced technologies being used in next-
generation telecommunication networks and enterprise data/storage networks.
Interphase's products include telecom server communication controllers,
server-based adapter cards, network operating system device drivers,
software development tools and management software applications.
Key Terms and Definitions
Interphase is a technology company and many terms used by the Company may be
unfamiliar to those outside the industry. Following are some key terms that
may be useful in helping the reader understand the products, technologies
and markets relevant for the Company.
Adapter - Also called a host bus adapter (HBA) or network interface card
(NIC). An adapter is a device that connects a computer server to one or
more peripheral devices (such as switches, hubs, storage devices, etc.) or
other computers. An adapter card typically plugs into the expansion bus on
the motherboard of the computer and communicates with the operating system
controlling the system via the use of specific device drivers.
AIN - (Advanced Intelligent Network) The primary architecture of the public
switched telephone system (PSTN) in the 1990s, which provides enhanced
voice, video and data services and dynamic routing capabilities. It uses
digital switches known as Signal Switching Points (SSPs) that query
databases in computer systems known as Service Control Points (SCPs).
ATM - (Asynchronous Transfer Mode) A network technology for both LANs and
WANs that supports real time voice and video as well as data. The topology
uses switches that establish a logical circuit from end to end, which
guarantees a quality of service (QoS) for that transmission. However, unlike
telephone switches that dedicate circuits end to end, unused bandwidth in
ATM circuits can be appropriated whenever available. For example, idle
bandwidth in a videoconference circuit can be used to transfer data. ATM is
also highly scalable and supports transmission speeds of 1.5, 25, 100, 155,
622 and 2488 Mbps.
Broadband - A transmission facility (communications link) that has bandwidth
(capacity) greater than a voice grade line.
Communications Controller - Communications I/O adapter (similar to a network
interface card) designed specifically for carrier-grade computer systems
that often support signaling, switching and routing networks. Communication
controllers must conform to specifications that maintain overall system
compliance to the rigorous performance and reliability standards that apply
to telecom service provider equipment into which they are integrated.
CompactPCI - An industrial grade variation of the PCI bus standard that
utilizes the Eurocard (VME) form factor. CompactPCI has been widely adopted
by telecom equipment suppliers because of its high-density connectors,
support for front or rear I/O access and hot-swap capabilities important for
"Five 9's" (99.999%) reliability.
Device Drivers - A program routine that links an adapter card (or other
device) to the operating system. It is written by software engineers who
understand the detailed knowledge of the adapter's command language and
characteristics and contains the precise machine language necessary to
perform the functions requested by the application. When a new adapter is
added to the computer, its driver must be installed in order to run it. The
operating system calls the driver, and the driver "drives" the adapter.
Routines that perform internal functions, such as memory managers and disk
caches, are also called drivers.
DSL - A relatively new broadband technology that carries data signals up to
20 times faster than 56K dial-up modems on the high-frequency portions of
phone lines that also transmit voice. Unlike with dial-up services, DSL
users don't dial a phone number to log on to the Internet. Like cable-modem
service, a DSL line is continuously open. DSL requires two modems, one at
the customer end and one at the phone company end (called a DSLAN), which
communicate constantly with each other. DSL providers don't usually sell
their services directly to consumers - they typically resell them through
Internet service providers such as America Online and Mindspring.
Broadband telecom controllers System - As related to Interphase, an
Broadband telecom controllers system is a highly specialized computer server
that resides in an "industrial" environment requiring high-availability and
maximized "up-time." Typical uses for this type of server include military
applications such as on-board ship communications or avionics, or next-
generation telecommunication applications such as intelligent call routing,
call number portability or base station communications control for wireless
service.
Fast Ethernet - A variation of the Ethernet standard (10Base-T) that
provides 100 Mbps transmission bandwidth, and up to 200 Mbps total I/O
throughput with full duplex operation.
Fibre Channel - A high-speed transmission technology that can be used as a
front-end communications network, a back-end storage network, or both at the
same time. With Fibre Channel, servers can not only talk to the storage
system via SCSI (storage protocol, see below), but the hosts can talk to
each other via IP (Internet Protocol) over the same network. Fibre Channel
supports existing peripheral interfaces and communications protocols. Its
name is somewhat misleading, as Fibre Channel supports coaxial cable and
twisted pair copper wiring as well as single mode and multimode fiber
connections.
Frame Relay - A high-speed packet switching protocol used in wide area
networks (WANs). Providing a granular service of up to DS3 speed (45 Mbps),
it has become very popular for LAN-to-LAN connections across remote
distances. All the major telecommunications carriers offer frame relay
services. Frame relay is much faster than X.25 networks, the first packet-
switching WAN standard, because frame relay was designed for today's
reliable circuits and performs less rigorous error detection.
Gigabit Ethernet - An Ethernet technology that raises transmission speed to
one Gbps and is used primarily for backbone networks and high-speed server-
to-server connectivity.
ISDN - A system of digital connections that has been available for over a
decade and has gained increased use in the last few years for high-speed
data and video transmission.
LAN - (Local Area Network) A short distanced data communications network
that is contained within a building or complex. Its primary use is to link
computers and peripheral devices (such as printers) and to provide
individuals with access to databases and applications running on servers
attached to the network. Anyone connected to the LAN can send messages to
and work jointly with others on the network.
NAS - (Network Attached Storage) A network topology that provides a common
pool of storage that can be shared by multiple servers and clients,
regardless of their file system or operating system. Network Attached
Storage servers are self-contained, intelligent devices that attach directly
to an existing LAN. A file system is located and managed on the NAS server
and data is transferred to network clients over industry standard network
protocols such as IP (Ethernet).
Operating System - The master control program that runs the computer. It is
the first program loaded when the computer is turned on, and its main part,
called the kernel, resides in memory at all times. It may be developed by
the vendor of the computer it's running in or by a third party. It is an
important component of the computer system because it sets the operational
guidelines for all application programs that run on the system. All programs
must "talk to" the operating system. Popular network operating systems
today include Windows NT and 2000, HP-UX, AIX and Linux.
PCI - A bus standard (Peripheral Components Interconnect) that is currently
the main general-purpose bus in virtually every desktop computer and a
majority of servers throughout the world.
PCI-X - A high-performance extension to the PCI Local Bus that is designed
to meet the increased I/O demands of technologies such as Fibre Channel,
Gigabit Ethernet, and Ultra3 SCSI.
PMC - (PCI Mezzanine Card) a low profile mezzanine card that is
electronically equivalent to the Peripheral Component Interconnect (PCI)
specification. PMC cards are used as a quick and cost-effective method to
add modular I/O to other card formats such as VME and CompactPCI.
Remote Access Server - A remote access server is a computer that provides
access to remote users (such as telecommuters, road warriors and branch
office locations) via analog or digital modems and ISDN connections.
SAN - (Storage Area Network) A flexible "any-to-any" networking
infrastructure linking multiple servers to multiple storage devices. Based
on Fibre Channel technology, SANs have recently emerged as the highest
performance data communications environment available today to interconnect
servers and storage. Running at Gigabit speeds, SANs offer better
scalability, fault recovery and general manageability than current client-
server LAN-based approaches for real-time and data intensive applications.
Storage Area Networks are being widely deployed for video editing, prepress
and data mining applications throughout the general IT marketplace.
SCSI - (Small Computer System Interface) Pronounced "skuzzy," SCSI is a
widely used communications technology for connecting computer servers to
storage devices. The technology is especially popular in applications where
network servers are attached to numerous SCSI drives and configured as
fault-tolerant RAID clusters. In the event one drive fails, the system is
still operational. SCSI-based RAID is widely used in file servers, database
servers and other network servers. Interphase products utilize Ultra2 SCSI,
which provides up to 80 Mbps data throughput and Ultra3 SCSI, which doubles
the throughput to 160 Mbps.
Server - A computer in a network shared by multiple users. These are
typically more powerful than computers used by individuals (often referred
to as "desktops") and require advanced I/O connectivity. In enterprise
network environments, some computers may be dedicated to a single task. For
instance, an Internet server is a computer that provides World Wide Web
services on the Internet. If the Web server is used internally and not by
the public, it may be known as an "intranet server."
SS7 - (Signaling System 7) The protocols used in the U.S. telephone system
for setting up calls and providing modern transaction services such as
caller ID, automatic recall and call forwarding. When you dial "1" in front
of a number, SS7 routes the call to your long distance carrier. It also
routes local calls based on the first three digits of the phone number.
T1 - A digital transmission link with a capacity of 1.544 Mbps (1,544,000
bits per second). T1 links normally handle 24 voice conversations, but with
digital encoding can handle many more voice channels. T1 lines are also
used to connect networks across remote distances. The European equivalent
(E1) handles 30 voice channels.
T3 - A digital transmission link equivalent to 28 T1 lines. Providing a
capacity of 45 Mbps, a T3 link is capable of handling 672 voice
conversations.
WAN - (Wide Area Network) A communications network that covers a wide
geographic area, such as state or country. A WAN typically extends a LAN
(Local Area Network, see above) outside the building, over telephone common
carrier lines to link to other LANs in remote locations, such as branch
offices or at-home workers and telecommuters. WANs typically run over
leased phone lines, but are increasingly also employing the Internet for VPN
(virtual private network) connectivity.
Strategy
The Company's strategy is to provide innovative, high-performance
connectivity solutions for the telecommunications and enterprise server
markets. To achieve this strategy, Interphase pursues several key
initiatives that include:
Providing an advanced line of communication controllers for next-generation
telecom servers.
To capitalize on the trend towards the acquisition of I/O connectivity from
third party vendors by telecommunication server providers, Interphase offers
a comprehensive line of carrier-class communications controllers for:
* 2.5 and 3G Wireless - controllers that provide enhanced mobile services
and integration with the Internet
* Fast Internet Access - controllers that enable broadband Internet
connectivity and high-speed wireless Internet access
* Intelligent Network Migration - controllers that help service providers
migrate their AIN facilities to more scalable and versatile network
architectures
Beginning in 2001, the Interphase telecommunication solutions offering also
includes a Professional Services organization responsible for customizing
software and third party applications to customer specific designs. With
high-performance communication controllers, software development tools, the
industry's broadest protocol support, and complementary professional
services, Interphase helps decrease costs and improve time-to-market for
service providers building next-generation telecom networks.
Offering a comprehensive server I/O adapter product portfolio.
In order to provide Interphase customers with effective storage networking
solutions, Interphase offers a comprehensive line of storage networking
adapters specifically designed for use in demanding, enterprise class
applications such as:
* Enterprise Connectivity - mission critical backbone and Internet servers
* Server-attached Storage - high-throughput direct-attached storage servers
* Storage Area Networks - servers providing connectivity for SAN and NAS
applications
Delivering superior customer service.
Over the past 25 years, Interphase has established strong relationships with
key suppliers of enterprise computer and telecommunication servers. Much of
this success has been due to the superior pre- and post-sale service the
Company delivers to customers. With a vertically integrated account
perspective, Interphase provides flexibility, timely response and other
customized account service features. Further, the Company's technical
support is divided into functional groups supporting either server I/O or
telecommunication product offerings, allowing Interphase to specifically
focus its support efforts for the different needs and requirements of its
customers in these differing market segments.
Expanding the company's base of quality channel partners.
In keeping with its efforts to expand the total available market for its
product offerings, Interphase continues to build a broad base of
distribution channel partners that provide cost-effective penetration into
the enterprise IT segment. Through its Gold Rush Partners Program, the
Company recruits high-end resellers (VARs) and systems integrators that are
building storage-centric solutions for their enterprise customers.
Developing strategic partnerships.
Interphase is an acknowledged leader in multi-vendor interoperability. The
Company leverages this leadership position into strategic partnerships with
its Diamond Developer Partners Program. Through this program, Interphase
builds synergistic marketing and technical relationships with other key
suppliers in its respective markets. Rigorous product testing and early
access to new partner product releases allows tighter product integration
and helps assure compatibility for the Company's end-user customers.
Products
Interphase offers an advanced line of telecom communication controllers, a
comprehensive portfolio of Fibre Channel SAN adapters (including HBA SAN
management software) and adapters for remote access and WAN communications.
Telecom Communication Controllers
Interphase products designed for use in next-generation Broadband telecom
controllers telecommunication servers include:
* 4531 PMC ATM over T3/E3 Communications Controller - a PCI Mezzanine
Card that provides reliable, high performance ATM communications over
T3/E3 connections for applications such as aggregating Internet traffic
for transport over the public ATM backbone network.
* 4534 PMC Quad-port Serial Communications Controller - a PCI Mezzanine
Card that provides reliable, high performance serial communications for
multiple telecommunication protocols including ATM, ISDN, Frame Relay,
X.25 and PPP.
* 4535 PMC Multiprotocol Communications Controller - a PCI Mezzanine Card
that provides four high-speed serial communication links to provide
connection to the Public Switch Telephone Network to support advanced
SS7 or AIN applications.
* 4537 PMC Multiprotocol Communications Controller - a PCI Mezzanine Card
targeted specifically for telecommunication applications that require
multiple T1/E1 interfaces. The 4537 supports multiple frame-based
protocols, such as ATM and SS7, provides options for front or rear I/O
access, and includes an integrated Channel Service Unit.
* 4575 PMC ATM Communications Controller - a PCI Mezzanine Card that
provides reliable, high performance ATM SONET OC-3 155 Mbps
connectivity.
* 5575 PCI ATM Adapter - a PCI adapter card that provides full duplex ATM
connectivity for systems running Windows NT, Novell NetWare, UnixWare,
Solaris and AIX.
* 6535 CompactPCI T1/E1/J1 Communications Controller - a 6U CompactPCI
communications controller with an advanced architecture featuring the
Motorola MPC8260 RISC CPU that offers superior performance over
T1/E1/J1 communication links.
* 6575 CompactPCI ATM Communications Controller - a 3U or 6U CompactPCI
adapter that provides full duplex ATM connectivity at OC-3 data rates
for industrial and telecommunication server computers.
Server I/O Products
Interphase server I/O products targeted for use in enterprise applications
include the following:
* 5526 PowerSAN PCI Fibre Channel Adapter - a 33Mhz PCI bus adapter which
provides single port 100 MBps Fibre Channel connectivity.
* 5527 PowerSAN PCI Fibre Channel Adapter - a 66Mhz PCI bus adapter which
provides single port 100 MBps Fibre Channel connectivity.
* 5540 PowerSAN PCI Fibre Channel Adapter - a 66Mhz PCI bus adapter which
provides price-effective 1-Gbps storage connectivity for basic Fibre
Channel SAN connectivity.
* 5541 PowerSAN PCI Fibre Channel Adapter - a low profile version of the
5540 that is only half of the height of normal PCI cards, allowing use
in the new smaller profile (1U) servers being increasingly used in
Internet server and e-commerce applications.
* 5550 PowerSAN PCI Fibre Channel Adapter - a 66Mhz PCI bus adapter which
provides two independent 1-Gbps Fibre Channel connections for high-
reliability SAN applications.
* 5560 PowerSAN PCI Fibre Channel Adapter - a 66Mhz PCI bus adapter which
provides 2-Gbps Fibre Channel connectivity for applications requiring
maximized data throughput.
* FibreView Enterprise - a JAVA-based management utility which allows
enterprise IT managers to control Fibre Channel server connections from
anywhere within the network via the Internet.
* 5570 SlotOptimizer PCI Storage Networking Adapter - a 64-bit PCI
multifunction adapter card providing full duplex Gigabit Fibre Channel
and high-performance Gigabit Ethernet connectivity.
* 552C SlotOptimizer PCI Storage Networking Adapter - a 64-bit PCI
multifunction adapter card combining dual channel Ultra2 SCSI
connectivity with two 10/100 Ethernet ports.
* 553C SlotOptimizer PCI Storage Networking Adapter - a 64-bit PCI
multifunction adapter card combining dual channel Ultra3 SCSI
connectivity with two 10/100 Ethernet ports.
* 554E SlotOptimizer Quad-port Fast Ethernet Adapter - a 64-bit PCI
adapter card that provides four independent full-duplex Fast Ethernet
ports.
Remote Access and WAN Communications Adapters
Interphase also offers communication adapters that enable remote access
server communications in enterprise WAN environments. Flagship Interphase
products for remote access and WAN connectivity include:
* 5535 ENTIA ATM over T1 Communications Controller - an PCI WAN
controller that uses an on-board CPU and memory to locally execute all
communications protocols. Providing either single or dual port PRI or
T1/E1 connectivity, this controller is a cost-effective connectivity
solution for small and medium size enterprise networking environments.
* 5536 ENTIA V.90 Digital Modem Controller - a PCI WAN controller that
uses an on-board CPU and memory to locally process all communications
protocols. Offering up to 60 digital modems and simultaneous processing
of both ISDN and analog (V.34 and V.90) call traffic, this adapter is a
cost-effective solution for remote users requiring access to enterprise
network applications.
New Product Development
The markets for the Company's products are characterized by rapid
technological development, evolving industry standards, frequent new product
introductions and relatively short product life cycles. The Company's
success is substantially dependent upon its ability to anticipate and react
to these changes, maintain its technological expertise, expand and enhance
its product offerings in existing technologies, and develop, in a timely
manner, new products in emerging technologies that achieve market
acceptance. The Company believes it must offer products to the market that
not only meet ever-increasing performance and quality standards, but also
provide compatibility and interoperability with products and architectures
offered by various computer and network systems vendors. The continued
utility of the Company's products can be adversely affected by products or
technologies developed by others.
The Company has been engaged in the development of new products and the
refinement of its existing products since its inception. Interphase has
been active in the formulation of industry standards sanctioned by groups
such as the IEEE, ANSI, VME International Trade Association (VITA), Fibre
Channel Industry Association (FCIA), Infiniband Trade Association (ITA), PCI
Industrial Manufacturers Group (PICMG), Project UDI, Fast Ethernet Alliance,
SCSI Committee, the LADDIS Group, ONC/NFS Consortium, University of New
Hampshire FDDI Interoperability Lab, FC-Open (Fibre Channel) Consortium, and
ANTC Consortium for FDDI interoperability testing.
Marketing and Customers
The Company's standard products are sold to OEM's for inclusion in
scientific, industrial, medical, engineering workstations, printing, mini-
supercomputer, graphics and other computer applications. These purchasers
incorporate the Company's products in proprietary systems for resale to
distributors, system integrators and VAR's (which may add specially designed
software) prior to resale to end-users. Also, the Company sells products
directly to sophisticated end-users such as large corporations, universities
and scientific research organizations. During 2000, sales to Hewlett
Packard and Terayon Communication Systems accounted for $10 million or 18%
and $5.9 million or 11% of consolidated revenues, respectively, and were the
only customers accounting for more than 10% of consolidated revenues.
During 1999, sales to Hewlett Packard accounted for $36.9 million or 50% of
consolidated revenues, and was the only customer accounting for more than
10% of consolidated revenues. During 1998, sales to Hewlett Packard
accounted for $28.3 million or 41% of consolidated revenues, and was the
only customer accounting for more than 10% of consolidated revenues.
The Company markets its products through its own sales organization and, to
a lesser extent, through a network of independent sales representatives. In
addition to the Company's headquarters in Dallas, Texas, the Company has
sales offices located in or near Santa Clara, California; Boston,
Massachusetts; Minneapolis, Minnesota; Paris, France and Bangkok, Thailand.
The Company's sales personnel market products directly to key customers as
well as support the sales representative network. In addition, the Company
has entered into distribution agreements with key national and international
distribution partners, including Ingram Micro, Tech Data, Fuji-Xerox,
Gates/Arrow and Macnica.
Interphase emphasizes its extensive product support, training and field
support to its customers. The Company's products are generally sold with a
one to three-year warranty covering components and labor. After the
expiration of the warranty period, the Company generally provides support
services for a stated flat fee.
The Company and its customers generally enter into written agreements
specifying, among other items standard in commercial agreements, product
specifications, failure rates, shipping requirements, shipment rescheduling
terms, price/volume schedules and manufacturer warranties. Substantially all
of these agreements do not contain determinable purchase commitments of the
customers, providing instead that actual purchase and shipments of products
be made by specific purchase order. Accordingly, any shipment dates stated
in such contracts are subject to rescheduling and/or cancellation, and
therefore are not indicative of the future purchase orders to be submitted
by such customer. In addition, the actual terms of the contracts tend to be
modified in the ordinary course of business by means of subsequent purchase
order terms and by course of dealing.
The Company does not believe that the level of backlog of orders is either
material or indicative of future results, since its contracts are subject to
revision through subsequent purchase orders and its customers are generally
permitted to cancel purchase orders, within certain parameters, prior to
shipment without penalty.
The majority of the Company's sales are to OEMs with payment terms typically
being net 30-45 days from the date of invoice.
Manufacturing and Supplies
Manufacturing operations are currently conducted at the Company's
headquarters in Dallas, Texas. The Company's products consist primarily of
various integrated circuits, other electronic components and firmware
assembled onto an internally designed printed circuit board.
The Company uses internally designed applications specific integrated
circuits ("ASIC"), some of which are sole-sourced, on some of its products
as well as standard off-the shelf items presently available from two or more
suppliers. Historically, the Company has not experienced any significant
problems in maintaining an adequate supply of these parts sufficient to
satisfy customer demand. The Company believes that it has good relations
with its vendors.
The Company generally does not manufacture products to stock in finished
goods inventory, as substantially all of the Company's production is
dedicated to specific customer purchase orders. As a result, the Company
does not have any material requirements to maintain significant finished
goods inventories.
Intellectual Property and Patents
While the Company believes that its success is ultimately dependent upon the
innovative skills of its personnel and its ability to anticipate
technological changes, its ability to compete successfully will depend, in
part, upon its ability to protect proprietary technology contained in its
products. The Company does not currently hold any patents relative to its
current product lines. Instead, the Company relies upon a combination of
trade secret, copyright and trademark laws and contractual restrictions to
establish and protect proprietary rights in its products. The development
of alternative, proprietary and other technologies by third parties could
adversely affect the competitiveness of the Company's products. Further,
the laws of some countries do not provide the same degree of protection of
the Company's proprietary information, as do the laws of the United States.
Finally, the Company's adherence to industry-wide technical standards and
specifications may limit the Company's opportunities to provide proprietary
product features capable of protection.
The Company is also subject to the risk of litigation alleging infringement
of third party intellectual property rights. Infringement claims could
require the Company to expend significant time and money in litigation, pay
damages, develop noninfringing technology or acquire licenses to the
technology, which is the subject of asserted infringement.
The Company has entered into several nonexclusive software licensing
agreements that allow the Company to incorporate software into its product
line thereby increasing its functionality, performance and interoperability.
Employees
At December 31, 2000, the Company had 197 full-time employees, of which 70
were engaged in manufacturing and quality assurance, 71 in research and
development, 31 in sales, sales support, service and marketing and 25 in
general management and administration.
The Company's success to date has been significantly dependent on the
contributions of a number of its key technical and management employees.
The loss of the services of one or more of these key employees could have a
material adverse effect on the Company. In addition, the Company believes
that its future success will depend in large part upon its ability to
attract and retain highly skilled and motivated technical, managerial, sales
and marketing personnel. Competition for such personnel is intense.
None of the Company's employees are covered by a collective bargaining
agreement and there have been no work stoppages. Additionally, the Company
considers its relationship with its employees to be good.
Competition
The computer network industry is intensely competitive and is significantly
affected by product introductions and market activities of industry
participants. The Company expects substantial competition to continue. The
Company's competition includes vendors specifically dedicated to the storage
I/O and telecommunication product markets. Traditionally the Company's
major OEM customers have chosen not to manufacture adapters for their
products or do not manufacture sufficient quantities or types of controllers
to meet their needs. Increased competition could result in price
reductions, reduced margins and loss of market share.
ITEM 2. PROPERTIES.
The Company leases a 96,000-square foot facility located in Farmers Branch,
Texas, a suburb of Dallas. The facility includes approximately $2.9 million
in leasehold improvements that were made by the Company. The lease,
inclusive of renewal options, extends through 2002. In addition, the
Company leases a facility in Chaville, France (near Paris) that supports the
European markets. The Company believes that its facilities and equipment are
in good operating condition and are adequate for its operations. The
Company owns most of the equipment used in its operations. Such equipment
consists primarily of engineering equipment, manufacturing and test
equipment and fixtures.
ITEM 3. LEGAL PROCEEDINGS.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS.
Since January 1984 shares of the Company's common stock have been traded on
The Nasdaq Stock Exchange under the symbol INPH. The following table
summarizes its high and low price for each quarter during 2000 and 1999 as
reported by Nasdaq.
2000 High Low
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First Quarter 41.750 17.250
Second Quarter 26.875 13.125
Third Quarter 25.750 16.125
Fourth Quarter 16.438 7.938
1999 High Low
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First Quarter 9.063 6.125
Second Quarter 23.000 6.500
Third Quarter 34.375 15.938
Fourth Quarter 44.750 17.250
The Company had approximately 4,800 beneficial owners of its common stock,
of which 64 are of record as of March 1, 2001.
The Company has not paid dividends on its common stock since its inception.
The Board of Directors does not anticipate payment of any dividends in the
foreseeable future and intends to continue its present policy of retaining
earnings for reinvestment in the operations of the Company.
The Board of Directors has adopted a Shareholder Rights Plan whereby each
holder of record as of December 29, 2000 received a right to purchase from
the Company one share of common stock of the Company at a price of $93 per
share for each share held. These rights can only be exercised after certain
events occur, such as if a person or entity acquires, or makes a tender or
exchange offer to acquire 15% or more of the Company's common stock and the
rights expire ten years from the record date. Upon acquisition of 15% or
more of the Company's common stock, each right not owned by the acquiring
person or group will be adjusted to allow the purchase for $93 of a number
of shares having a then market value of $186. These rights are intended to
provide the Company certain antitakeover protections. The Board of
Directors may terminate the Rights Plan, or redeem the rights for $0.01 per
right, at any time until the tenth business day following a public
announcement of a 15% or more stock acquisition. The Company has reserved
7,000,000 shares of common stock for this plan.
The rights were distributed to shareholders as of the record date as a non-
taxable dividend. The rights are attached to and trade with Interphase
common stock until the occurrence of one of the triggering events, at which
time the rights would become detached from the common stock.
ITEM 6. SELECTED FINANCIAL DATA
Statement of Operations Data:
(In Thousands, except per share data)
Twelve months ended December 31,
2000 1999 1998 1997 1996
---------------------------------------------------
Revenues $55,697 $73,502 $68,690 $66,004 $56,752
---------------------------------------------------
Gross Profit 29,688 34,702 33,598 32,016 27,964
---------------------------------------------------
Research and development 10,359 10,590 10,766 13,327 9,902
Sales and marketing 10,731 11,036 10,060 11,686 10,297
General and administrative 4,824 5,366 5,417 6,248 4,905
In process research and
development - - - - 11,646
---------------------------------------------------
Operating income (loss) 3,774 7,710 7,355 755 (8,786)
---------------------------------------------------
Other, net 333 (1,030) (1,583) (1,525) (705)
Income (loss) from
continuing operations
before income tax 4,107 6,680 5,772 (770) (9,491)
Income (loss) from
continuing operations 2,400 4,291 3,542 (971) (10,055)
Discontinued
operations, net 571 (867) (829) - -
---------------------------------------------------
Net income (loss) $2,971 $3,424 $2,713 $(971) $(10,055)
---------------------------------------------------
Income (loss) from
continuing operations
per share
Basic $0.41 $0.77 $0.64 $(0.18) $(1.99)
Diluted $0.38 $0.70 $0.63 $(0.18) $(1.99)
Net income (loss)
per share
Basic $0.51 $0.61 $0.49 $(0.18) $(1.99)
Diluted $0.48 $0.56 $0.48 $(0.18) $(1.99)
Weighted average
common shares 5,805 5,593 5,508 5,496 5,062
Weighted average
common & common
equivalent shares 6,237 6,113 5,628 5,496 5,062
Twelve months ended December 31,
Balance Sheet Data: 2000 1999 1998 1997 1996
---------------------------------------------------
Working capital $37,502 $35,314 $26,314 $25,244 $22,836
Total assets 54,473 54,671 50,288 49,447 53,924
Total liabilities 12,534 14,536 18,463 19,904 23,538
Redeemable common stock 1,780 2,796 3,813 - -
Shareholders' equity 40,159 37,339 28,012 29,543 30,386
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This report contains forward-looking statements with respect to financial
results and certain other matters. These statements are made under the
"safe harbor" provisions of the Private Securities Litigation Reform Act of
1995 and involve a number of risks and uncertainties that could cause actual
results to differ materially from those in the forward-looking statements.
Such risks and uncertainties include, without limitation, fluctuations in
demand, the quality and price of similar or comparable networking products,
access to sources of capital, general economic conditions in the Company's
market areas and that future sales and growth rates for the industry and the
Company could be lower than anticipated.
Consolidated Statement of Operations as a Percentage of Revenues
Year ended December 31,
2000 1999 1998
-------------------------------
Revenues 100.0 % 100.0 % 100.0 %
Cost of sales 46.7 % 52.8 % 51.1 %
-------------------------------
Gross profit 53.3 % 47.2 % 48.9 %
Research and development 18.6 % 14.4 % 15.7 %
Sales and marketing 19.3 % 15.0 % 14.6 %
General and administrative 8.6 % 7.3 % 7.9 %
-------------------------------
Operating income 6.8 % 10.5 % 10.7 %
-------------------------------
Interest income 2.1 % 0.6 % 0.5 %
Interest expense (1.1)% (0.9)% (1.5)%
Other, net (0.5)% (1.1)% (1.3)%
-------------------------------
Income (loss) from continuing
operations before income taxes 7.4 % 9.1 % 8.4 %
Provision for income taxes 3.1 % 3.3 % 3.2 %
-------------------------------
Income (loss) from continuing 4.3 % 5.8 % 5.2 %
operations
Discontinued operations 1.0 % (1.2)% (1.2)%
-------------------------------
Net income (loss) 5.3 % 4.6 % 4.0 %
===============================
RESULTS OF OPERATIONS
In September 1999, the Company completed the sale of its Voice Over Internet
Protocol ("VOIP") business. Accordingly, the Company's consolidated
financial statements and notes included herein, for all periods presented
reflect the VOIP business as a discontinued operation in accordance with
Accounting Principles Board Opinion No. 30.
Revenues consist of product revenues and are recognized in accordance with
SEC Staff Accounting Bulletin (SAB) 101, "Revenue Recognition." Product
revenues are recognized upon shipment, provided fees are fixed and
determinable, a customer order is obtained, and collection is probable.
Revenues from reseller agreements are typically recognized when the product
is sold through to the end customer. Deferred revenue consists of revenue
from reseller arrangements and certain arrangements with extended payment
terms.
Revenues: Total revenues for the years ended December 31, 2000, 1999 and
1998 were $55.7 million, $73.5 million and $68.7 million, respectively.
Revenues decreased 24% in 2000 compared to 1999. The decrease in revenue
was primarily attributable to the effects of the transitional period where
the Company is refocusing its efforts on its new Fibre Channel and Telecom
Communication Controller products. During this period, several of the new
Fibre Channel products experienced delays in the engineering phase. Due to
the intense competition in the industry, these delays had a significant
impact on sales during 2000. Additionally, 30% of the revenues in 1999 were
attributable to Hewlett Packard's purchases of a Fibre Channel product,
which ceased in the first quarter of 2000. The decrease in revenues during
2000 was partially offset by sales of products through an end-of-life
program instituted in 2000 for many of the Company's legacy products. The
Company began this program in an effort to focus its resources on its new
product lines.
The growth in revenues from 1998 to 1999 was 7%. The increase in revenue
was attributable to growth in the Company's Storage and Broadband telecom
controller product lines, partially offset by a decline in LAN and WAN
products. In 1999, Storage revenues, which consist of Fibre Channel and
SCSI technologies, accounted for approximately 48% of total revenues, LAN
revenues which consist of FDDI, Fast Ethernet, ATM and Ethernet, accounted
for 36% of total revenues, WAN accounted for 7% of total revenues and
Broadband telecom controllers accounted for 9% of total revenues. North
American revenues grew 14%, Pacific Rim revenues grew 78%, and European
revenues declined 26% compared to 1998. In 1999, sales to one OEM customer
accounted for approximately 50% of the Company's revenue.
Gross Profit: Gross profit as a percentage of sales was 53% for the year
ended December 31, 2000, 47% for the year ended December 31, 1999 and 49%
for the year ended December 31, 1998. The increase in the gross profit rate
is primarily the result of a change in product mix and product cost
improvements that began in late 1999, whereby the Company improved its
purchasing and production processes.
Research and Development: The Company's investment in the development of
new products through research and development was $10.4 million, $10.6
million and $10.8 million in 2000, 1999, and 1998, respectively. As a
percentage of revenue, research and development expenses were 19%, 14% and
16% for 2000, 1999 and 1998, respectively. Research and development costs
decreased slightly in 2000, primarily due to a reduction in variable
spending in response to decreased revenues for the year. However, the
research and development investment in 2000 resulted in new products that
will provide the foundation for the Company's product lines in 2001 and
beyond.
Sales and Marketing: Sales and marketing expenses were $10.7 million, $11
million, and $10.1 million in 2000, 1999 and 1998, respectively. As a
percentage of revenue, sales and marketing expenses were 19%, 15% and 15%
for 2000, 1999 and 1998, respectively. The decrease in sales and marketing
expenses in 2000 is primarily the result of decreased revenues, which
resulted in reduced sales commissions and bonuses for the year, partially
offset by increased marketing activity used to position the Company for
future product releases.
General and Administrative: General and administrative expenses were $4.8
million, $5.4 million, and $5.4 million in 2000, 1999 and 1998,
respectively. As a percentage of revenue, general and administrative
expenses were 9%, 7% and 8% for 2000, 1999 and 1998, respectively. General
and administrative costs have been relatively consistent in recent years.
However, the decrease in 2000 costs, relative to 1999, is primarily due to
lower headcount related expenses, as the number of employees in the general
and administrative function decreased from 33 as of December 31, 1999 to 25
as of December 31, 2000.
Interest Income: Interest income was $1.2 million, $481,000 and $338,000 in
2000, 1999 and 1998, respectively. The increase in interest income from year
to year is a reflection of the increase in the funds available for
investment.
Interest Expense: Interest expense was $587,000, $694,000 and $1 million in
2000, 1999 and 1998, respectively. The decrease in interest expense is due
to the reduction of the Company's credit facility.
Other Expense, Net: Other expense, net, was $266,000, $817,000 and $896,000
in 2000, 1999 and 1998, respectively. Other expense primarily reflects the
amortization of goodwill and acquired developed technologies related to a
1996 acquisition of Synaptel. However, the net decrease in 2000 is
primarily due to the increase in other income generated by hedging
transactions on certain marketable securities received in the sale of the
Company's VOIP business. For the year ended December 31, 2000, these
hedging transactions resulted in a gain of approximately $689,000.
Provision for Income Taxes: The Company's provision for taxes was $1.7
million, $2.4 million and $2.2 million in 2000, 1999 and 1998, respectively.
The effective income tax rates were 42% in 2000, 36% in 1999 and 39% in
1998. The Company's effective tax rate is greater than the statutory rate
primarily due to nondeductible goodwill amortization. The increase in the
Company's effective income tax rate, from 1999 to 2000, is primarily due to
the decrease in foreign earnings, which are offset by foreign loss carry
forwards.
Discontinued Operations: In 1999, the Company sold its VOIP business for
$2.4 million. However, due to the uncertainty of payment on the proceeds
that remained unpaid as of December 31, 1999, the Company recognized income
upon payment. In 2000, the remaining $830,000 due for the technology
license fee was collected and recorded as a gain on disposal of discontinued
operations. Additionally, in 2000, the Company sold its 20% interest in
Quescom for $400,000, resulting in a gain of $91,000. The total gain in
2000 was $571,000 net of $350,000 tax. There were no operating activities
during 2000 related to the VOIP business. Gain on disposal of assets was
$326,000, net of tax, in 1999. Operating losses, net of tax, for the VOIP
business were $1.2 million and $829,000 for 1999 and 1998, respectively.
Net Income (Loss): The Company reported net income of $3 million in 2000,
$3.4 million in 1999 and $2.7 million in 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents and marketable securities aggregated
$17.5 million and $16.3 million at December 31, 2000 and 1999. The growth
in cash, cash equivalents and marketable securities from 1999 to 2000 is
primarily attributable to cash generated by the Company's operations,
proceeds received from the exercise of stock options and cash received in
connection with the sale of its VOIP business.
Expenditures for equipment and purchased software were $1.1 million, $2
million and $2.9 million in 2000, 1999 and 1998, respectively. At December
31, 2000, the Company had no material commitments to purchase capital
assets. The Company's significant long-term obligations are its operating
lease on its Dallas facility, future debt payments and repurchase of
Interphase common stock from Motorola (described below).
The Company has a $16 million credit facility with a financial institution.
This credit facility includes an $8.5 million term loan, a $2.5 million
equipment loan and a $5 million revolving credit facility. The term and
equipment loans are due in quarterly installments, and expire in November
2001. The revolving credit facility expires in June 2002. In 2001,
maturities of this credit facility will be approximately $1.7 million. The
Company has not paid any dividends since its inception and does not
anticipate paying any dividends in 2001.
Effective October 1998, the Company approved a stock repurchase agreement
with Motorola, Inc. to purchase ratably from October 1998 to July 2002, all
of the shares owned by Motorola for $4.1 million at $6.25 per share. Under
the terms of the agreement, Motorola retains the right as an equity owner
and has assigned its voting rights to the Company. The Company cancels the
stock upon each repurchase. Prior to the repurchase agreement, Motorola
owned approximately 12% of the Company's outstanding common stock. The
future scheduled payments are classified as redeemable common stock in the
accompanying consolidated balance sheets. As of December 31, 2000, 375,336
shares have been repurchased for $2.3 million and retired; 284,664 shares
remain to be repurchased.
The Company expects that its cash, cash equivalents, marketable securities
and proceeds from its credit facility will be adequate to meet foreseeable
needs for at least the next 12 months.
Recently Issued Accounting Pronouncements
On January 1, 2001, the Company adopted SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended by SFAS 137 and SFAS 138.
SFAS 133 requires all derivatives to be recorded at fair value. Changes in
the fair values of derivatives are recorded in either the statement of
operations or as a component of comprehensive income, depending on whether
the derivative qualifies as a hedge, and depending on the type of hedging
relationship that exists. Adoption of this standard did not have a material
effect on the Company's financial statements.""
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Foreign currency risk - Revenues originating outside of the United States
totaled 15%, 17% and 22% of total revenues in 2000, 1999, and 1998. Due to
the fact that the Company conducts business on a global basis in various
foreign currencies, it is exposed to adverse movements in foreign currency
exchange rates. During the periods presented, the Company entered into
certain foreign currency forward exchange contracts to reduce the risk of
foreign exchange exposure. Neither the foreign currency transaction gains
and losses nor the gains and losses on the forward contracts were
significant. The Company has not used, nor do they expect to use, forward
contracts for trading purposes.
Interest Rate Risk - The Company is exposed to interest rate risk under its
Credit Facility, which currently bears interest at 8.5%. The Company does
not enter into hedging arrangements to mitigate this risk.
Market Price Risk - The Company maintains a minority equity investment in a
publicly traded Company and recorded a $925,000 net after tax unrealized
loss during 2000 on this investment. The Company's ability to sell certain
equity positions is restricted under contractual arrangements. During 2000
the Company entered into a hedge on a portion of this equity investment,
realizing a gain of $689,000 on the transaction. The Company has no equity
hedge contracts outstanding as of December 31, 2000.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Item 14 (a) below.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Directors
See information regarding the directors and nominees for director under the
heading "Election of Directors" of the Proxy Statement for the Annual
Meeting of Shareholders to be held May 2, 2001, which is incorporated herein
by reference.
Executive Officers
As of March 1, 2001, the executive officers of the Company, their respective
ages, positions held and tenure as officers are listed below:
Executive
Officers of
the Company
Name Age Position(s) Held with the Company Since
----------------- --- ---------------------------------- -----------
Gregory B. Kalush 44 Chairman of the Board, Chief 1998
Executive Officer and President
Steven P. Kovac 45 Chief Financial Officer, Treasurer 1999
and Vice President of Finance
Gregory B. Kalush joined the Company in February 1998, as Chief Financial
Officer, Vice President of Finance and Treasurer. Mr. Kalush was appointed
the Chief Executive Officer, President and Director of the Company in March
1999 and was elected Chairman of the Board in May 2000. Mr. Kalush is also
the sole member of the New Employee and Retention Stock Option Committee of
the Board of Directors. Prior to joining Interphase, Mr. Kalush was with
DSC Communications Corporation from 1995 to 1997. While at DSC, he served
as Vice President Transmission Data Services, Vice President of Operations,
International Access Products and Group Vice President of Finance, Transport
Systems Group. Prior to DSC, Mr. Kalush was with IBM Corporation from 1978
to 1994. During that time his positions included Chief Financial Officer
and Operations Executive for the Skill Dynamics Business Unit, Director of
Finance, Planning and Administration for the Southwest area, and Division
Director of Finance and Operations for the Data Systems division.
Steven P. Kovac joined the Company in May 1999 as Chief Financial Officer,
Vice President of Finance and Treasurer. Prior to Interphase, from 1997 to
1999 Mr. Kovac served as Chief Operating Officer and Chief Financial Officer
for TPN Inc., a satellite television network. From 1989 to 1997 Mr. Kovac
was the Regional Vice President of Finance and Chief Financial Officer for
AT&T Wireless Services, McCaw Cellular Communications and LIN Cellular
Communications. From 1988 to 1989, Mr. Kovac was Vice President of Finance
and Administration for BBL Industries, a manufacturer of paging terminals
and voice messaging equipment. Mr. Kovac is a member of the Board of
Directors for Integrated Systems Corporation, a reseller of DSL and
satellite ISP, located in Denver, Colorado.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item will be included in the Proxy
Statement for the Annual Meeting of Shareholders to be held on May 2, 2001,
which is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The information required by this Item will be included in the Proxy
Statement for the Annual Meeting of Shareholders to be held on May 2, 2001,
which is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item will be included in the Proxy
Statement for the Annual Meeting of Shareholders to be held on May 2, 2001,
which is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) (i) and (ii) Financial Statements and Schedules.
Reference is made to the listing on page F-1 of all financial statements and
schedules filed as a part of this report.
(iii) Exhibits.
Reference is made to the Index to Exhibits on page E-1 for a list of all
exhibits filed during the period covered by this report.
(b) Reports on Form 8-K.
The Registrant has filed no Reports on Form 8-K during the quarter ended
December 31, 2000.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
INTERPHASE CORPORATION
Date: March 26, 2001 By: /s/ Gregory B. Kalush
-----------------------
Gregory B. Kalush
Chairman of the Board, Chief
Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on March 26, 2001.
Name Title
--------------------------- ---------------------------
/s/ Gregory B. Kalush Chairman of the Board,
--------------------------- Chief Executive Officer and President
Gregory B. Kalush (Principal executive officer)
/s/ Steven P. Kovac Chief Financial Officer, Treasurer
--------------------------- and Vice President of Finance
Steven P. Kovac (Principal financial officer)
/s/ James F. Halpin Director
---------------------------
James F. Halpin
/s/ Paul N. Hug Director
---------------------------
Paul N. Hug
/s/ David H. Segrest Director
---------------------------
David H. Segrest
/s/ S. Thomas Thawley Vice Chairman, Director
--------------------------- and Secretary
S. Thomas Thawley
/s/ William R. Voss Director
---------------------------
William R. Voss
INDEX TO EXHIBITS
Exhibits
--------
2 (a) Stock Purchase Agreement, dated as of June 29, 1996, among
Interphase Corporation, Synaptel and Philippe Oros, Xavier
Sutter, Francois Lecerf, Schroder Ventures French Enterprise
Fund LPI (USA), Schroder ventures French Enterprise Fund
UKLP (UK) and Schroder Ventures Holding Limited (UK). (7)
3 (a) Certificate of Incorporation of the registrant. (1)
3 (b) Amendment to Articles of Incorporation of the registrant. (10)
3 (c) Amended and Restated Bylaws of the registrant adopted on December
5, 1995. (6)
10 (a) Registrant's Amended and Restated Stock Option Plan and Amendment
No. 1 and 2 thereto. (9)
10 (b) Registrant's Amended and Restated Stock Option Plan Amendment
No. 4. (10)
10 (c) Registrant's Incentive Stock Option Sub-Plan. (3)
10 (d) Stock Purchase Warrant issued to Motorola, Inc. (4)
10 (e) Lease on Dallas facility. (5)
10 (f) Directors Stock Option Plan and Amendment No. 1 thereto. (6)
10 (g) Directors Stock Option Plan Amendment No. 2 (10)
10 (h) Loan Agreement between Interphase Corporation and BankOne Texas,
N.A. (8)
10 (i) Purchase Agreement between Interphase Corporation and Cisco
Systems Inc. (9)
10 (j) Motorola Stock Repurchase Agreement (2)
10 (k) Rights Agreement dated as of December 7, 2000 by and between
the Company and Computershare Investor Services, LLC as Rights
Agent. (11)
23 (a) Consent of Independent Public Accountants. (12)
_____________________
(1) Filed as an exhibit to Registration Statement No. 2-86523 on
Form S-1 and incorporated herein by reference.
(2) Filed as an exhibit to Report on Form 8-K on October 15, 1998, and
incorporated herein by reference.
(3) Filed as an exhibit to Report on Form 10-K for the year ended October
31, 1988 and incorporated herein by reference.
(4) Filed as an exhibit to Report on Form 10-Q for the quarter ended April
30, 1989 and incorporated herein by reference.
(5) Filed as an exhibit to Report on Form 10-K for the year ended October
31, 1994 and incorporated herein by reference.
(6) Filed as an exhibit to Report on Form 10-K for the year ended October
31, 1995 and incorporated herein by reference.
(7) Filed as an exhibit to Report on Form 8-K on August 6, 1996, and
incorporated herein by reference.
(8) Filed as an exhibit to Report on Form 8-KA on October 4, 1996, and
incorporated herein by reference.
(9) Filed as an exhibit to Report on Form 10-K for the year ended December
31, 1996 and incorporated herein by reference.
(10) Filed as an exhibit to Report on Form 10-K for the year ended December
31, 1999 and incorporated herein by reference.
(11) Filed as an exhibit to Form 8-K on January 9, 2001, and incorporated
herein by reference.
(12) Filed herein.
INDEX TO FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
Management's Report on Financial Responsibility F-2
Report of Independent Public Accountants -
Arthur Andersen LLP F-3
Consolidated Balance Sheets - As of December 31, 2000 and 1999 F-4
Consolidated Statements of Operations - Years Ended
December 31, 2000, 1999 and 1998 F-5
Consolidated Statements of Shareholders' Equity - Years Ended
December 31, 2000, 1999 and 1998 F-6
Consolidated Statements of Cash Flows - Years Ended F-7
December 31, 2000, 1999 and 1998
Notes to Consolidated Financial Statements F-8 to F-21
F-1
MANAGEMENT'S REPORT ON FINANCIAL RESPONSIBILITY
Management is responsible for the preparation and fairness of the
consolidated financial statements of Interphase Corporation and all other
information contained in this annual report. The accompanying consolidated
financial statements have been prepared in accordance with accounting
principles generally accepted in the United States and reflect informed
judgments and estimates, which management believes to be reasonable.
The Company maintains an effective system of internal accounting controls,
which are modified periodically as the Company's operations change.
Additionally, the Company is receptive to suggestions made by Arthur
Andersen LLP, its independent public accountants, regarding enhancements and
changes to the Company's existing internal accounting controls. Overall,
management believes that its system of internal accounting controls is
adequate to provide reasonable assurance as to the integrity and reliability
of its financial statements, and the safeguarding of assets.
The Board of Directors, acting through its Audit Committee, monitors the
accounting affairs of the Company and has approved the accompanying
consolidated financial statements. The Audit Committee, consisting of three
directors, reviews the results of the annual financial statement audit, and
the actions taken by management in discharging its responsibilities for
accounting and financial reporting. The Audit Committee meets periodically
and privately with management and the independent public accountants to
assure that each is carrying out its responsibilities.
Gregory B. Kalush
Chairman of the Board,
Chief Executive Officer and President
February 6, 2001
F-2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of Interphase Corporation:
We have audited the accompanying consolidated balance sheets of Interphase
Corporation (a Texas corporation) and subsidiaries as of December 31, 2000
and 1999, and the related consolidated statements of operations,
shareholders' equity, and cash flows for each of the three years in the
period ended December 31, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Interphase Corporation
and subsidiaries as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 2000, in conformity with accounting principles generally
accepted in the United States.
ARTHUR ANDERSEN LLP
Dallas, Texas
February 6, 2001
F-3
INTERPHASE CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except number of shares data)
December 31,
ASSETS 2000 1999
------ ----------------------
Cash and cash equivalents $ 10,587 $ 10,988
Marketable securities 6,886 5,288
Trade accounts receivable, less allowances
for uncollectible accounts of $273 and
$260, respectively 14,085 14,005
Inventories 13,193 11,678
Prepaid expenses and other current assets 941 1,383
Deferred income taxes 844 774
----------------------
Total current assets 46,536 44,116
----------------------
Machinery and equipment 8,033 9,149
Leasehold improvements 2,954 2,907
Furniture and fixtures 490 475
----------------------
11,477 12,531
Less-accumulated depreciation (9,755) (10,334)
----------------------
Total property and equipment, net 1,722 2,197
----------------------
Capitalized software, net 490 684
Deferred income taxes, net 1,146 1,458
Acquired developed technology, net 1,680 2,280
Goodwill, net 2,590 2,830
Other assets 309 1,106
----------------------
Total assets $ 54,473 $ 54,671
======================
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Liabilities
Accounts payable 1,417 2,129
Deferred revenue 1,093 -
Accrued liabilities 2,816 1,586
Accrued compensation 1,947 2,131
Income taxes payable 78 754
Current portion of debt 1,683 2,202
----------------------
Total current liabilities 9,034 8,802
Other liabilities - 570
Long-term debt, net of current portion 3,500 5,164
----------------------
Total liabilities 12,534 14,536
Commitments and contingencies
Common stock redeemable; 284,664 and
447,332 shares respectively 1,780 2,796
Shareholders' Equity
Common stock, $.10 par value; 100,000,000
shares authorized; 5,480,550 and 5,391,296
shares issued and outstanding, respectively 548 539
Additional paid in capital 36,805 35,998
Retained earnings 3,178 207
Cumulative other comprehensive (loss) income (372) 595
----------------------
Total shareholders' equity 40,159 37,339
----------------------
Total liabilities and shareholders' equity $ 54,473 $ 54,671
======================
The accompanying notes are an integral part of these consolidated
financial statements.
F-4
INTERPHASE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Years ended December 31,
------------------------------------
2000 1999 1998
------------------------------------
Revenues $ 55,697 $ 73,502 $ 68,690
Cost of sales 26,009 38,800 35,092
------------------------------------
Gross profit 29,688 34,702 33,598
------------------------------------
Research and development 10,359 10,590 10,766
Sales and marketing 10,731 11,036 10,060
General and administrative 4,824 5,366 5,417
------------------------------------
Total operating expenses 25,914 26,992 26,243
------------------------------------
Operating income 3,774 7,710 7,355
Interest income 1,186 481 338
Interest expense (587) (694) (1,025)
Other, net (266) (817) (896)
------------------------------------
Income from continuing operations
before income taxes 4,107 6,680 5,772
Provision for income taxes 1,707 2,389 2,230
------------------------------------
Income from continuing operations 2,400 4,291 3,542
Discontinued operations (Note 7)
Gain on disposal of VOIP business,
net of tax 571 326 -
Operating losses from VOIP
business, net of tax - (1,193) (829)
------------------------------------
Net income $ 2,971 $ 3,424 $ 2,713
====================================
Income from continuing
operations per share
Basic $ 0.41 $ 0.77 $ 0.64
------------------------------------
Diluted $ 0.38 $ 0.70 $ 0.63
------------------------------------
Net income per share
Basic $ 0.51 $ 0.61 $ 0.49
------------------------------------
Diluted $ 0.48 $ 0.56 $ 0.48
------------------------------------
Weighted average common shares 5,805 5,593 5,508
------------------------------------
Weighted average common and
common equivalent shares 6,237 6,113 5,628
------------------------------------
The accompanying notes are an integral part of these consolidated
financial statements.
F-5
INTERPHASE CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
Cumulative
Additional Retained Other
Common Stock Paid in Earnings Comprehensive Comprehensive
Shares Amount Capital (Deficit) Income (Loss) Total Income (Loss)
------------------------------------------------------------- -------------
Balance at December 31, 1997 5,516 $ 552 $ 34,774 $ (5,930) $ 147 $ 29,543 $ -
-------------------------------------------------------------
Option exercises, including
related tax benefit 6 1 19 - - 20 -
Redeemable common stock (660) (66) (4,059) - - (4,125) -
Comprehensive income (loss):
Foreign currency translation - - - - (205) (205) (205)
Unrealized holding period gain,
net of tax - - - - 66 66 66
Net income - - - 2,713 - 2,713 2,713
-------
Total comprehensive income - - - - - - $ 2,574
------------------------------------------------------------- -------------
Balance at December 31, 1998 4,862 $ 487 $ 30,734 $ (3,217) $ 8 $ 28,012
-------------------------------------------------------------
Option exercises, including
related tax benefit 529 52 5,264 - - 5,316 $ -
Comprehensive income (loss):
Foreign currency translation - - - - (105) (105) (105)
Unrealized holding period gain,
net of tax - - - - 692 692 692
Net income - - - 3,424 - 3,424 3,424
-------
Total comprehensive income - - - - - - $ 4,011
------------------------------------------------------------- -------------
Balance at December 31, 1999 5,391 $ 539 $ 35,998 $ 207 $ 595 $ 37,339
-------------------------------------------------------------
Option exercises, including
related tax benefit 90 9 807 - - 816 $ -
Comprehensive income (loss):
Foreign currency translation - - - - (80) (80) (80)
Unrealized holding period loss,
net of tax - - - - (887) (887) (887)
Net income - - - 2,971 - 2,971 2,971
-------
Total comprehensive income - - - - - - $ 2,004
------------------------------------------------------------- -------------
Balance at December 31, 2000 5,481 $ 548 $ 36,805 $ 3,178 $ (372) $ 40,159
-------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
F-6
INTERPHASE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years ended December 31,
---------------------------------
2000 1999 1998
---------------------------------
Cash flows from operating activities:
Income from continuing operations $ 2,400 $ 4,291 $ 3,542
Operating loss from discontinued operations - (1,193) (829)
Gain on disposal of discontinued operations 571 326 -
Adjustments to reconcile income from continuing
operations to net cash provided by operating
activities:
Depreciation and amortization 2,615 3,640 4,013
Deferred income taxes 242 (340) (344)
Tax benefit from stock option exercises 277 1,500 -
Changes in assets and liabilities-
Trade accounts receivable 1,013 (289) (686)
Inventories (1,515) 1,810 1,407
Prepaid expenses and other current assets (388) (527) (58)
Accounts payable and accrued liabilities 518 (787) (643)
Accrued compensation (184) 90 131
Income taxes payable (676) (654) 1,211
---------------------------------
Net adjustments 2,473 3,576 4,202
---------------------------------
Net cash provided by operating activities 4,873 7,867 7,744
---------------------------------
Cash flows from investing activities:
Additions to property, equipment, capitalized
software and leasehold improvements (1,093) (2,003) (2,892)
Decrease in other assets 304 916 1
Cash received in sale of VOIP business 1,230 600 -
Proceeds from the sale of marketable securities 852 - -
Purchases of marketable securities, net of
unrealized holding period gain or loss (3,337) (1,166) (92)
---------------------------------
Net cash used by investing activities (2,044) (1,653) (2,983)
---------------------------------
Cash flows from financing activities:
(Decrease) increase in other long-term liabilities (570) (303) 273
Payments on debt (2,183) (2,253) (2,458)
Purchase of redeemable common stock (1,016) (1,017) (312)
Proceeds from the exercise of stock options 539 3,816 20
---------------------------------
Net cash (used) provided by financing activities (3,230) 243 (2,477)
---------------------------------
Net (decrease) increase in cash and cash equivalents (401) 6,457 2,284
Cash and cash equivalents at beginning of year 10,988 4,531 2,247
---------------------------------
Cash and cash equivalents at end of year $ 10,587 $ 10,988 $ 4,531
=================================
Supplemental Disclosure of Cash Flow Information:
Interest paid 608 698 953
Taxes paid 1,729 1,703 891
The accompanying notes are an integral part of these consolidated financial statements.
F-7
INTERPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Basis of Presentation: The consolidated
financial statements include the financial statements of Interphase
Corporation (the "Company") and its wholly owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated.
In September 1999, the Company completed the sale of its VOIP business.
Accordingly, the Company's consolidated financial statements and notes
included herein, for all periods presented reflect the VOIP business as a
discontinued operation in accordance with Accounting Principles Board
Opinion No. 30. See further discussion of the sale in Note 7.
Cash and Cash Equivalents: The Company considers cash and temporary
investments with original maturities of less than three months, as well as
interest bearing money market accounts, to be cash equivalents.
Investments - Investments in debt and equity securities are classified as
available for sale with unrealized holding gains and losses reported
in other comprehensive income. Management determines the appropriate
classification of securities at the time of purchase. Earnings from debt
securities are calculated on a yield to maturity basis and recorded in the
results of operations.
Allowance for doubtful accounts: As of December 31, 2000, 1999 and 1998,
the allowance for doubtful accounts was $273,000, $260,000 and $164,000.
The activity in this account was as follows (in thousands):
Balance at Write-offs Balance
Beginning Charged to Net of at End
Year Ended: of Period Expense Recoveries of Period
--------------------------------------------------------------------
December 31, 2000 $ 260 $ 358 $ (345) $ 273
December 31, 1999 164 120 (24) 260
December 31, 1998 544 392 (772) 164
Inventories: Inventories are valued at the lower of cost or market and
include material, labor and manufacturing overhead. Cost is determined on a
first-in, first-out basis (in thousands):
Years ended December 31,
2000 1999
-------------------------
Raw Materials $ 9,439 $ 8,044
Work-in-process 3,280 3,352
Finished Goods 474 282
------- -------
Total $ 13,193 $ 11,678
======= =======
Property and Equipment: Property and equipment are recorded at cost.
Depreciation and amortization are provided over the estimated useful lives
of depreciable assets using the straight-line method. When property and
equipment are sold or otherwise retired, the cost and accumulated
depreciation applicable to such assets are eliminated from the accounts, and
any resulting gain or loss is reflected in current operations. Related
depreciation expense and accumulated depreciation were as follows (in
thousands):
Year ended Depreciation Accumulated
December 31: Expense Depreciation
------------ ------- ------------
2000 $ 1,370 $ 9,755
1999 2,035 10,334
1998 2,436 10,339
The depreciable lives of property and equipment are as follows:
Machinery and equipment 3-5 years
Leasehold improvements 3-10 years
Furniture and fixtures 5-7 years
Capitalized Software: Capitalized software represents various software
licenses purchased by the Company and utilized in connection with the
Company's network and mass storage products as well as the general
operations of the Company. Capitalized software is amortized over 3-5 years
utilizing the straight-line method. Related amortization expense and
accumulated amortization were as follows (in thousands):
Year ended Amortization Accumulated
December 31: Expense Amortization
------------ ------- ------------
2000 $ 345 $ 2,139
1999 280 1,875
1998 302 1,656
Research and Development Subsidy: Included in other assets at December 31,
2000 and 1999, is a receivable for a subsidy of $72,000 and $529,000,
respectively, due from the French government related to the research and
development activities of the Company's Paris based operation.
Long-Lived Assets: Intangibles and other long-lived assets are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. Any impairment would be recognized
in operating results if a permanent reduction in value were to occur.
Revenue Recognition: Revenues consist of product revenues and are
recognized in accordance with SEC Staff Accounting Bulletin (SAB) 101,
"Revenue Recognition." Product revenues are recognized upon shipment,
provided fees are fixed and determinable, a customer order is obtained, and
collection is probable. Revenues from reseller agreements are typically
recognized when the product is sold through to the end customer. Deferred
revenue consists of revenue from reseller arrangements and certain
arrangements with extended payment terms.
Concentration of Credit Risk: Financial instruments which potentially
expose the Company to concentrations of credit risk consist primarily of
trade accounts receivable. The majority of the Company's sales have been to
original equipment manufacturers of computer systems.
The Company conducts credit evaluations of its customers' financial
condition and limits the amount of trade credit extended when necessary.
The Company establishes an allowance for doubtful accounts based upon
factors surrounding the credit risk of specific customers, historical trends
and other information.
Research and Development: Research and development costs are charged to
expense as incurred.
Foreign Currency Translation: Assets and liabilities of certain non-U.S.
subsidiaries are translated at current exchange rates, and related revenues
and expenses are translated at average exchange rates in effect during the
period. Resulting translation adjustments are reflected in shareholders'
equity as a component of comprehensive income (loss).
Income Taxes: The Company determines its deferred taxes using the liability
method. Deferred tax assets and liabilities are based on the estimated
future tax effects of differences between the financial statement and tax
basis of assets and liabilities given the provisions of enacted tax law.
The Company's consolidated financial statements include deferred income
taxes arising from the recognition of revenues and expenses in different
periods for income tax and financial reporting purposes.
Certain Reclassifications: Certain prior year amounts have been
reclassified to conform with the 2000 presentation.
Use of Estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires Company management to
make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
2. ACQUISITION
As a result of the acquisition of Synaptel, S.A. ("Synaptel") and certain
product rights acquired from Cisco Systems, Inc. ("Cisco"), the Company
acquired intangible assets related to developed technologies, assembled
workforce and goodwill. Developed technology and assembled workforce are
amortized on a straight-line basis over a 7-year period. Goodwill is
amortized on a straight-line basis over a 15-year period. Acquired product
rights from Cisco are amortized ratably over the anticipated revenue stream
of such products sold. The December 31, 2000 intangible balances at
historical cost and related amortization expense and accumulated
amortization were as follows (in thousands):
Amortization Expense Accumulated Ending
Intangibles 2000 1999 1998 Amortization Balance
---------------------------------------------------------
Developed technology $ 4,230 $ 600 $ 600 $ 600 $2,550 $ 1,680
Assembled workforce 390 60 60 60 255 135
Goodwill-Synaptel 3,596 240 240 240 1,006 2,590
Acquired Product
Rights-Cisco 2,500 - 485 435 2,500 -
3. MARKETABLE SECURITIES
Marketable securities consist of investments in equity and debt securities.
As of December 31, 2000 and 1999, the fair market value of marketable
securities was $6.9 million and $5.3 million, respectively. During 2000,
the Company realized a gain of $689,000 from the sale of securities. The
Company had an unrealized loss of $887,000 (net of taxes) in 2000, and an
unrealized gain of $692,000 (net of taxes) in 1999, with respect to certain
available-for-sale securities.
4. DERIVATIVES AND HEDGINGS
The Company addresses certain financial exposures through a controlled
program of risk management that includes the use of derivative financial
instruments on a minimal basis. The Company does not utilize or expect to
utilize derivative financial instruments for trading or speculative
purposes.
During the periods presented, the Company entered into certain foreign
currency forward exchange contracts to reduce the risk of foreign exchange
exposure. Neither the foreign currency transaction gains and losses nor the
gains and losses on the forward contracts were significant. Additionally,
the Company entered into a hedge on a portion of an equity investment
realizing a gain of $689,000 on the transaction. The Company has no equity
hedge contracts outstanding as of December 31, 2000.
On January 1, 2001, the Company adopted SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended by SFAS 137 and SFAS 138.
SFAS 133 requires all derivatives to be recorded at fair value. Changes in
the fair values of derivatives are recorded in either the statement of
operations or as a component of comprehensive income, depending on whether
the derivative qualifies as a hedge, and depending on the type of hedging
relationship that exists. Adoption of this standard did not have a material
effect on the Company's financial statements.
5. ACCRUED LIABILITIES
Accrued liabilities consisted of the following (in thousands):
Years ended December 31,
2000 1999
-----------------------
Accrued outside commissions $ 300 $ 362
Accrued property tax 281 147
Accrued other 2,235 1,077
------ ------
$ 2,816 $ 1,586
====== ======
6. CREDIT FACILITY
The Company maintains a credit facility with a bank. The credit facility
consists of an $8.5 million acquisition term loan, a $2.5 million equipment
financing facility and a $5 million revolving credit facility. The
revolving credit facility matures June 30, 2002, and bears interest at the
bank's base rate (currently 8.5%). The term loan and equipment loan are
payable in equal quarterly installments totaling $548,000 plus accrued
interest with final payment due November 30, 2001. The Company has the
ability to satisfy the quarterly payments on the term notes through
borrowing under the revolving credit component of the credit facility. The
credit facility is collateralized by marketable securities, accounts
receivable and equipment. The credit facility includes certain restrictive
financial covenants including, among others, tangible net worth, total
liabilities to tangible net worth, interest coverage, quick ratio, debt
service coverage, and is subject to a borrowing base calculation. At
December 31, 2000, the Company was in compliance with all covenants. At
December 31, 2000, total availability under the revolving credit facility
was $1.5 million.
At December 31, 2000 and 1999, the Company's outstanding debt consisted of
the following (in thousands):
Year ended December 31,
2000 1999
-----------------------
Acquisition term loan $ 1,275 $ 2,975
Equipment financing loan 408 881
Borrowings under revolving credit facility 3,500 3,500
Other - 10
-------- --------
Total 5,183 7,366
Less current portion 1,683 2,202
-------- --------
Total long-term debt $ 3,500 $ 5,164
======== ========
The total scheduled debt principal payments are $1.7 million in 2001, $3.5
million in 2002 and zero thereafter.
7. DISPOSITION OF ASSETS
In June 1999, the Company sold an 80% interest in part of its VOIP business,
Quescom, for $1,172,000 to the former owner of Interphase's Paris Operation.
The sales proceeds consisted of $300,000 due at closing with a $830,000
technology license fee. In 2000, the remaining $830,000 due for the
technology license fee was collected and recorded as a gain on disposal of
discontinued operations. Additionally, in 2000, the Company sold its 20%
interest in Quescom for $400,000, resulting in a gain of $91,000. The total
gain in 2000 was $571,000 net of $350,000 tax.
In September 1999, the Company sold its other VOIP business, Zirca
Corporation ("Zirca"), along with the technologies developed by Zirca for
$300,000 cash and stock valued at $517,680 on the date of disposition, to
UniView Technologies, resulting in a gain of $140,000, net of $86,000 tax.
The UniView securities received as part of the agreement are included on the
Balance Sheet in Marketable Securities, and accounted for as available-for-
sale securities.
The following are the results from discontinued operations for the periods
presented: (in thousands)
Years ended December 31,
2000 1999 1998
--------------------------------
Operating losses from discontinued
operations before tax $ - $ (1,924) $ (1,337)
Income tax benefit - 731 508
Net loss from discontinued operations ------- -------- -------
$ - $ (1,193) $ (829)
======= ======== =======
8. INCOME TAXES
The provision for income taxes applicable to continuing operations for each
period presented was as follows (in thousands):
Year ended December 31,
2000 1999 1998
--------------------------------
Current provision $ 1,465 $ 2,729 $ 2,574
Deferred provision (benefit) 242 (340) (344)
------ ------ ------
Income tax expense $ 1,707 $ 2,389 $ 2,230
====== ====== ======
Tax effect of temporary differences that give rise to significant components
of the deferred tax assets as of December 31, 2000 and 1999, are presented
as follows (in thousands):
Year ended December 31,
2000 1999
---------------------
Current deferred tax assets:
Inventory $ 176 $ 559
Accounts receivable 151 147
Deferred Revenue 372 -
Vacation accrual 20 20
Other accruals 125 48
----- -----
Total $ 844 $ 774
===== =====
Noncurrent deferred tax
assets (liabilities), net:
Assets:
Depreciation $ 912 $1,450
Amortization 660 682
----- -----
1,572 2,132
Liabilities:
Other (426) (674)
----- -----
Total $1,146 $1,458
===== =====
The Company has not recorded a valuation allowance with respect to the
various domestic deferred tax assets, as management believes it is more
likely than not that these assets will be realized. Management periodically
reviews the realizability of the Company's deferred tax assets, as
appropriate, when existing conditions change the probability of realization.
The differences between the provision for income taxes computed on income
before income taxes at the U.S. federal statutory income tax rate (34%) and
the amount shown in the Consolidated Statements of Operations are presented
below (in thousands):
Year ended December 31,
2000 1999 1998
-------------------------------
Income taxes at statutory rate $ 1,396 $ 2,271 $ 1,962
State income taxes 189 168 11
Non-deductible goodwill
amortization 306 306 306
Benefit of tax loss carry-forward (209) (339) (131)
Other 25 (17) 82
------- ------- -------
Provision for income taxes $ 1,707 $ 2,389 $ 2,230
9. NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE
The following table shows the calculation of the Company's weighted average
common and common equivalent shares outstanding (in thousands):
Years ended December 31,
2000 1999 1998
---------------------------
Weighted average
shares outstanding 5,805 5,593 5,508
Dilutive impact of stock options 432 520 120
----- ----- -----
Total outstanding weighted
average common and common
equivalent shares 6,237 6,113 5,628
===== ===== =====
Anti-dilutive options of 348,000, 117,000 and 944,000 were excluded from the
dilutive calculation in 2000, 1999 and 1998, respectively.
10. COMMON STOCK
Amended and Restated Stock Option Plan: In 2000, the Company amended and
restated its Stock Option Plan which, as amended, authorizes the issuance to
employees of up to 3,500,000 shares of common stock in incentive stock
options (as defined in section 422 of the Internal Revenue Code of 1986, as
amended) and nonqualified stock options. The exercise price of the
incentive stock options must be at least equal to the fair market value of
the Company's common stock on the date of the grant, while the exercise
price of nonqualified stock options may be less than fair market value on
the date of grant, as determined by the Board. The Board may provide for
the exercise of options in installments and upon such terms, conditions and
restrictions as it may determine. Options granted prior to January 1, 1999
generally vest ratably over a 5-year period from the date of grant. Options
granted since January 1, 1999 generally vest ratably over a 3-year period
from the date of grant. The term of option grants may be up to 10 years.
Options are canceled upon the lapse of three months following termination of
employment except in the event of death or disability, as defined.
United Kingdom Stock Option Sub-Plan: This plan was adopted in 1988 for the
benefit of the Company's employees located in the United Kingdom. This plan
authorizes the issuance of options to purchase common stock of the Company
at prices at least equal to the fair market value of the common stock on the
date of the grant. The Board may provide for the exercise of options in
installments and upon such terms, conditions and restrictions as it may
determine. Options granted prior to January 1, 1999 generally vest ratably
over a 5-year period from the date of grant. Options granted since January
1, 1999 generally vest ratably over a 3-year period from the date of grant.
The term of option grants may be up to 10 years. The options are canceled
upon termination of employment, except in the event of death, retirement or
injury, as defined.
France Stock Option Sub-Plan: This plan was adopted in 2000 for the benefit
of the Company's employees located in France. This plan authorizes the
issuance of options to purchase common stock of the Company at prices at
least equal to the fair market value of the common stock on the date of the
grant. Unless otherwise decided by at the sole discretion of the Board, the
options vest (i) 75% after the expiration of a two-year period from the date
of grant and (ii) 25% after the expiration of a three-year period from the
date of grant. Except for the events provided under the French tax code,
the shares cannot be sold or otherwise disposed of for a period of five
years from the date of grant. The term of option grants may be up to 10
years. Options are canceled upon the lapse of three months following
termination of employment except in the event of death or disability, as
defined.
The following table summarizes the transactions under the Stock Option Plan
and the Stock Option Sub-Plans (in thousands, except option prices):
Number of Weighted Average
Options Option Price
--------------------
Balance, December 31, 1997 1,410 $ 10.80
===== ------
Granted 246 6.83
Exercised (17) 4.17
Canceled (499) 7.90
----- -----
Balance, December 31, 1998 1,140 8.62
Granted 793 16.47
Exercised (441) 7.09
Canceled (270) 8.48
----- -----
Balance, December 31, 1999 1,222 13.22
Granted 746 14.76
Exercised (80) 6.90
Canceled (248) 16.23
----- -----
Balance, December 31, 2000 1,640 13.85
----- -----
Exercisable at December 31, 2000 379 $ 12.44
===== ======
The following table summarizes information about options granted under the
Plan that were outstanding at December 31, 2000:
Options Outstanding Options Exercisable
------------------- ----------------------
Range of Exercise Number of Weighted-Average Weighted Number Weighted
Prices Outstanding Remaining Average Exercisable Average
at 12/31/00 Contractual Exercise at 12/31/00 Exercise
(000) Life Price (000) Price
---------------------------------------------------------------------------------------
$ 5.88-$ 7.94 395 7.31 $ 6.99 185 $ 6.86
$ 8.00-$18.88 924 9.12 13.45 109 13.66
$19.00-$41.75 321 9.03 23.45 85 23.05
---------------------------------------------------------------------------------------
Total 1,640 8.67 $13.85 379 $12.44
Amended and Restated Director Stock Option Plan: In 2000, the Company
amended and restated its Director Stock Option Plan, which, as amended,
authorizes the issuance to directors of up to 750,000 shares of common
stock. Stock option grants pursuant to the directors' plan will vest in one
year and have a term of 10 years. The exercise prices related to these
options are equal to the market value of the Company's stock on the date of
grant. The following table summarizes the transactions under the Director
Stock Option Plan (in thousands, except option prices):
Number of Weighted Average
Options Option Price
------------------------
Balance, December 31, 1997 231 $ 8.35
=== -----
Granted 40 8.09
--- ----
Balance, December 31, 1998 271 8.31
=== -----
Granted 35 7.50
Exercised (88) 8.20
Cancellations (25) 6.63
--- ----
Balance, December 31, 1999 193 8.43
=== -----
Granted 60 17.81
Exercised (10) 11.19
Cancellations (5) 10.25
--- ----
Balance, December 31, 2000 238 10.64
=== -----
Exercisable at December 31, 2000 178 $ 8.23
--- ----
The following table summarizes information about options granted under the
Plan that were outstanding at December 31, 2000:
Options Outstanding Options Exercisable
------------------- ----------------------
Range of Exercise Number of Weighted-Average Weighted Number Weighted
Prices Outstanding Remaining Average Exercisable Average
at 12/31/00 Contractual Exercise at 12/31/00 Exercise
(000) Life Price (000) Price
---------------------------------------------------------------------------------------
$4.38-$ 7.50 113 2.57 $ 6.03 113 $ 6.03
$8.09-$17.81 125 5.15 14.82 65 12.05
---------------------------------------------------------------------------------------
Total 238 3.92 $ 10.64 178 $ 8.23
Rights Agreement: The Board of Directors has adopted a Shareholder Rights
Plan whereby each holder of record as of December 29, 2000 received a right
to purchase from the Company one share of common stock of the Company at a
price of $93 per share for each share held. These rights can only be
exercised after certain events occur, such as if a person or entity
acquires, or makes a tender or exchange offer to acquire, 15% or more of the
Company's common stock and the rights expire ten years from the record date.
Upon acquisition of 15% or more of the Company's common stock, each right
not owned by the acquiring person or group will be adjusted to allow the
purchase for $93 of a number of shares having a then market value of $186.
These rights are intended to provide the Company certain antitakeover
protections. The Board of Directors may terminate the Rights Plan, or
redeem the rights for $0.01 per right, at any time until the tenth business
day following a public announcement of a 15% or more stock acquisition. The
Company had reserved 7,000,000 shares of common stock for this plan.
The rights were distributed to shareholders as of the record date as a non-
taxable dividend. The rights are attached to and trade with Interphase
common stock until the occurrence of one of the triggering events, at which
time the rights would become detached from the Company's common stock.
Pro-Forma Net Income (Loss): The Company's pro forma net income (loss) for
2000, 1999 and 1998 would have been $ (2.2 million), $1.5 million and $1.6
million respectively, resulting in diluted earnings per share of $(0.36),
$0.24 and $0.29, respectively. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option pricing model
with the following weighted-average assumptions used for options granted in
2000, 1999 and 1998: risk-free interest rate of 6% for each year 2000, 1999
and 1998, expected dividend yield of zero in each year, expected term of
3.88 in 2000, 4.83 years in 1999 and 4.41 years in 1998, and expected
volatility of 140% in 2000, 140.29% in 1999 and 117.31% in 1998. The
weighted average fair valuation per share was $12.63 in 2000, $14.25 in 1999
and $5.42 in 1998.
Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro-forma
compensation cost may not be representative of that to be expected in future
years.
11. RELATED-PARTY TRANSACTIONS
The Company paid approximately $253,000, $366,000 and $425,000 for the years
ended December 31, 2000, 1999 and 1998, respectively, to certain outside
directors of the Company or their firms for professional services. The
Company believes the terms were equivalent to those of unrelated parties.
12. STOCK REPURCHASE
Effective October 1998, the Company approved a stock repurchase agreement
with Motorola, Inc. to purchase all of the shares owned by Motorola for $4.1
million or $6.25 per share, ratably from October 1998 to July 2002. Under
the terms of the agreement, Motorola retains the right as an equity owner
and has assigned its voting rights to the Company. The Company cancels the
stock upon each purchase. The future scheduled payments are classified as
redeemable common stock in the accompanying consolidated Balance Sheet. As
of December 31, 2000, 375,336 shares have been purchased for $2.3 million
and retired.
13. EMPLOYEE BENEFIT PLAN
The Company maintains a defined contribution plan for those employees who
meet the plan's length of service requirements. Under the defined
contribution plan, employees may make voluntary contributions to the plan,
subject to certain limitations, and the Company matches employee's
contributions up to 3% of the employees' annual salary. The total expense
under this plan was $256,000, $232,000 and $240,000 for the years ended
December 31, 2000, 1999 and 1998 respectively. The Company offers no post-
retirement or post-employment benefits.
14. OTHER FINANCIAL INFORMATION
Major Customers: During 2000, sales to Hewlett Packard and Terayon
Communication Systems accounted for $10 million or 18% and $5.9 million or
11% of consolidated revenues, respectively, and were the only customers
accounting for more than 10% of consolidated revenues. During 1999, sales
to Hewlett Packard accounted for $36.9 million or 50% of consolidated
revenues, and was the only customer accounting for more than 10% of
consolidated revenues. During 1998, sales to Hewlett Packard accounted for
$28.3 million or 41% of consolidated revenues, and was the only customer
accounting for more than 10% of consolidated revenues.
Commitments: The Company leases its office, research and development and
manufacturing facility and certain manufacturing equipment under
noncancelable operating leases to 2005. Rent expense related to these
leases is recorded on a straight-line basis. As of December 31, 2000,
operating lease commitments having noncancelable terms of more than one year
are as follows (in thousands):
Year ending December 31:
------------------------
2001 $ 985
2002 878
2003 262
2004 182
2005 84
Thereafter -
Total rent expense for operating leases was approximately as follows (in
thousands):
Year Total Rent Expense
---- ------------------
2000 $1,120
1999 1,231
1998 1,089
Contingencies: The Company is involved in various legal actions and claims
arising in the ordinary course of business. Management believes that such
litigation and claims will be resolved without material effect on the
Company's financial position or results of operations.
15. SEGMENT DATA
The Company is principally engaged in the design, development and
manufacturing of advanced technologies for enterprise networks and storage
environments. The chief operating decision-makers review financial
information presented on a consolidated basis, accompanied by information by
geographic region for purposes of making operating decisions and assessing
financial performance. Accordingly, the Company considers itself to be in a
single industry segment.
Geographic revenue and long lived assets related to North America and other
foreign countries as of and for the years ended December 31, 2000, 1999 and
1998 are as follows (in thousands):
Revenues 2000 1999 1998
----------------------------------------------------------
North America $ 47,116 $ 60,791 $ 53,478
Europe 6,209 10,173 13,785
Pacific Rim 2,372 2,538 1,427
------- ------- -------
Total $ 55,697 $ 73,502 $ 68,690
======= ======= =======
Geographic long-lived assets exclude corporate assets. Corporate assets
include cash and cash equivalents, marketable securities and intangibles.
Long lived assets 2000 1999 1998
----------------------------------------------------------
North America $ 1,995 $ 2,658 $ 3,701
Europe 215 223 292
Pacific Rim 2 - -
------- ------- -------
Total $ 2,212 $ 2,881 $ 3,993
======= ======= =======
Additional information regarding revenue by product-line is as follows:
Product Revenue 2000 1999 1998
----------------------------------------------------------
WAN $ 1,547 $ 5,016 $ 6,983
LAN 20,615 26,516 42,652
Broadband telecom 12,501 6,422 1,823
Storage 21,034 35,548 17,232
------- ------- -------
Total $ 55,697 $ 73,502 $ 68,690
======= ======= =======
16. QUARTERLY FINANCIAL DATA (Unaudited)
Quarter Ended
March 31 June 30 September 30 December 31
-----------------------------------------------
2000 (in thousands, except per share amounts)
----
Revenues $13,585 $13,332 $13,260 $15,520
Gross profit 7,496 7,265 7,067 7,860
Income from continuing
operations before taxes 1,256 1,147 675 1,029
Income from continuing
operations 723 696 373 608
Discontinued operations 571 - - -
Net Income 1,294 696 373 608
Net income per share
Basic EPS $ .22 $ .12 $ .06 $ .11
Diluted EPS $ .20 $ .11 $ .06 $ .11
Quarter Ended
March 31 June 30 September 30 December 31
-----------------------------------------------
1999 (in thousands, except per share amounts)
----
Revenues $17,169 $17,657 $20,511 $18,165
Gross profit 7,819 8,272 9,845 8,766
Income from continuing
operations before taxes 1,482 1,114 2,387 1,697
Income from continuing
operations 936 763 1,390 1,202
Discontinued operations (512) (243) (112) -
Net Income 424 520 1,278 1,202
Net income per share
Basic EPS $ .08 $ .10 $ .22 $ .21
Diluted EPS $ .08 $ .09 $ .20 $ .19
Quarter Ended
March 31 June 30 September 30 December 31
-----------------------------------------------
1998 (in thousands, except per share amounts)
----
Revenues $17,589 $16,087 $17,042 $17,972
Gross profit 8,143 8,080 8,365 9,010
Income from continuing
operations before taxes 1,180 877 1,760 1,955
Income form continuing
operations 708 510 1,031 1,293
Discontinued operations - - (308) (521)
Net Income 708 510 723 772
Net income per share
Basic EPS $ .13 $ .09 $ .13 $ .14
Diluted EPS $ .13 $ .09 $ .13 $ .14